This year's Republican National Convention seemed to cause a stir (as usual), especially with the proposed return to the gold standard--a system that would peg the value of the dollar to gold. Many see it as a cheap ploy to get Ron Paul supporters to jump on the bandwagon; others think it's a huge step toward less government regulation and correcting America's nasty debt habit. Whatever the case, it doesn't seem too popular with either party.
A Rocky Relationship
This isn't the United States' first dance with the gold standard. In 1971, the United States participated in the Bretton Woods system--a system that pegged international currencies to the U.S. dollar, which was backed by gold ($35/ounce). This system fixed currency rates between countries, requiring governments to buy and sell currency to maintain rates.
In the midst of the Vietnam War, the U.S. sent $22 billion overseas, causing severe inflation and dropping the U.S. dollar's value relative to gold - in other words, gold was worth more than $35/ounce on the open market. "Foreign price-gougers," as they were so aptly named, then took advantage of the country's "promise to pay" clause and demanded the United States pay back their debts in gold so that it could be sold for profit on the open market.
This loophole led Nixon to withdraw from the Bretton Woods system almost overnight, rattling the international currency system in what was appropriately named "The Nixon Shock." The United States, along with the other major international currencies, made the move to fiat money, and officially cut off all ties between international currencies.
So, why should I care?
If you think a switch to the gold standard is just another talking point lost in the political noise, think again. Here are the top three ways a switch to the gold standard could really hit you where it hurts:
1. If the country went on the gold standard, currency rates would be fixed and the government wouldn't be able to manipulate the market. This is great for preventing inflation, but bad for a depressed economy.
Say, for example, the United States has a high unemployment rate--usually the Fed adjusts interest rates to compensate and encourage spending, but the gold standard wouldn't allow it. Instead, the price of goods would rise, putting a strain on many people's already very tight budgets. Pricey goods mean less demand, which, as any Econ 101 class would tell you, is no good for the economy.
2. Although gold is a concrete commodity, it's just that--a commodity subject to the open market, and supply and demand. The price of gold can change and, if on the gold standard, would destabilize the value of the dollar. Though many don't believe gold prices will fluctuate, it's still a possibility that could change the value of (what you thought would be) your savings account.
If the price of gold fluctuates, the value of your cash gets dragged along with it. Gold prices could drop, in turn dropping the value of the dollar and making your hard-earned savings worth far less than it should. The gold standard would make your earnings susceptible to the whims of the open market--maybe not the most reliable way to handle your finances.
3. Though the gold standard would protect the U.S. dollar from hyperinflation, that's far less likely to happen than deflation, or an increase in the value of the dollar. This may seem like a pretty sweet deal, but when the dollar value rises, prices drop, which is not too bad until you realize your salary drops with it.
If prices fall, companies are less willing to pay for labor, so salaries plummet while, unfortunately, your debts don't. You'd have to work more to pay off the same old credit-card debt, mortgages, or pesky student loans. Only the wealthy would really benefit from a return to the gold standard, leaving the rest of us down in the debt dumps.
It seems that whether you're a Democrat, Republican, or anything in between makes no difference. It's just a matter of whether you trust your government. Gold standard supporters usually lead with a call for less regulation, but the gold standard doesn't change if there's regulation, just who's regulating. Overall, the gold standard is a thing of the past and that's how it should stay. You fool us once, shame on you; fool us twice? Eh, we'd rather not find out.
Angie Picardo is the chief content manager at NerdWallet.com, a personal finance website dedicated to helping consumers find the best credit cards--at least while our currency system still exists.
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